Consumer debt market shows signs of 'healing'

As borrowers emerge from recession, student loans raise new alarms

As 2012 drew to a close, the overall consumer debt market
showed "some clear signs of healing" from the deepest financial
downturn since the Great Depression, says newly released research from the
Federal Reserve Bank of New York.

At the same time, Fed economists used a first-of-its-kind
press briefing Thursday to send a warning that rising default rates for student loans
are putting pressure on consumers and could crimp the recovery.

Total
consumer credit increased in the fourth
quarter of 2012 by less than half a percent or about $31 billion, according to
the New York Fed's quarterly report on household debt and credit, released Feb.
28. The slight uptick in total consumer debt marks the first time that
households have increased their total, in aggregate, since the spring of 2008.

"While it's too soon to conclude that a trend has been
established in which households are beginning to increase their debts again,
there are signs that the four-year long contraction is slowing," said New
York Fed director of research James McAndrews. Whether the fourth quarter
marked a turning point toward the expansion of consumer borrowing -- and resulting
higher economic growth -- won't be known for several more months, he added.

The housing market is beginning to pick up substantially,
said McAndrews, just as consumers are gradually increasing the total amount of
household debt they carry.

Plus, more households are also paying back their bills on
time, he said, showing that consumers are getting a better handle on their
debts.

The modest uptick in debt and continuing decline in most
delinquencies are particularly significant, he said, given the history
consumers have had with debt since the recession.

The New York Fed's quarterly report "has documented the
enormous rise in consumer delinquencies and defaults as the housing bust and
the Great Recession unfolded, and, over the last several years has provided an
in-depth look at a very large reduction in household debt -- the largest we
have ever witnessed."

Card balances' slight rise
Credit card balances grew by $5 billion in the final quarter of the year,
contributing to the overall boost in household borrowing. This was the second
consecutive quarter that credit card balances grew.

Despite the increase in card debt toward the end of the
year, consumers still charged significantly less in 2012 than they did in 2011. Overall,
balances fell by $25 billion -- 4 percent -- for the full year of 2012, according to an additional presentation by New York Fed Senior Vice President Wilbert van
der Klaauw.

Delinquencies longer than 90 days saw a slight uptick in the
quarter, however, to 10.57 percent of balances from 10.45 percent. The rise was
the first since 2011, but van der Klaauw said the result could be a blip in the
figures, which are not adjusted seasonally.

"I would
emphasize the longer-term trend here," he said, adding that coming
quarters will show whether delinquencies in fact returned to an upward path.
Overall, late payments on credit cards fell substantially in 2012 compared to
the previous year.

Consumers are still trying to recover from the Great
Recession, said Don Dutkowsky, a professor of economics at the Maxwell School
of Citizenship and Public Affairs at Syracuse University.

As a result, many consumers remain exceptionally cautious
about the amount of debt they're willing to take on, he says, particularly
since the economy shows few signs of roaring back to its pre-recession level
any time soon.

"It's hard to place complete confidence in the economy
where it stands right now," Dutkowsky said. "It is a fragile recovery
at best, which has gotten waylaid several times ... We're still far from fully
recovered and far from healthy and robust as an economy. So consumers are being
careful because it's their jobs that are on the line."

Inside the report
Each quarter, the Federal Reserve evaluates approximately 40 million consumer
credit reports to take Americans' credit-using pulse.

Some of the highlights of this quarter's report include:

Banks
remain tight about the amount of credit they're willing to lend to new and
current customers. Credit card limits -- the amount of debt that banks
allow consumers to borrow -- declined by $9 billion in the fourth quarter
of 2012 (about 0.3 percent).

Consumers
don't appear eager to add new cards to their wallets. Slightly more
consumers opened new accounts as the year drew to a close. However, the
increase was small and followed
two consecutive quarters in which the
number of open credit card accounts fell.

Consumers
are also slowly increasing the amount they borrow on other types of loans.
Total consumer credit -- the amount of debt outstanding on all loan types
-- grew to $11.34 trillion (0.3
percent) in the fourth quarter of the year. In particular, auto loans and
student loans dominated that growth. However, as the Fed notes in its
report, that's still well below the amount of debt consumers accumulated
before and during the recession. At its peak, total consumer credit hit
$12.68 trillion in the third quarter of 2008, according to the Fed.

Student
loan warning soundedWhile investment in
education can be expected to yield long-term economic benefits as it boosts
people's incomes, student loan debt loads are cutting into borrowers' ability
to take on other forms of credit, Fed economists said.

Student loan debt "is a
growing concern" Senior Economist Donghoon Lee said during his segment of
the presentation. "In relation to other types of household debt, the
increase in student debt is unique."

Student loan debt nearly
tripled from 2004 to 2012, continuing on its growth trend through the financial
crisis and recession, while other forms of lending cooled. Higher costs of
education and more people opting for college and graduate school both contributed
to the rise, Lee said.

Student loan delinquencies
continue to rise while other types of household debt see firming repayment. The
fourth-quarter's 11.73 percent 90-day-plus delinquency rate for student loans
is up from 8.45 percent a year earlier.

Reported delinquency rates
are understated, Lee said, because a large portion of loans are not in
repayment status. "Nearly one-third of borrowers in repayment are
delinquent on student debt."

Not surprisingly, he said, people with high student loan debts were less
likely to borrow for a house or take on other forms of consumer debt.

Asked whether the trend will hamper
future growth, van der Klaauw said, "Obviously, the accumulation of
student debt is an issue; delinquency is an even bigger issue."

Looking aheadIn the final quarter of 2012, many
consumers were confronting an unusual amount of uncertainty about their
finances thanks to ongoing fiscal debates in Congress about what to do about
government taxation and budget cuts, according to experts. "I think it would have been hard
to avoid," said David Nice, an associate economist with Mesirow Financial.
"It was everywhere."

Now, much of that uncertainty still hasn't been resolved,
thanks to continued government gridlock over deep cuts in federal spending that
are scheduled to take effect Friday.

That, in turn, could have a negative effect on consumer spending, say experts, which could help stymie the economy's recovery. "This kind of economy is kind of like a sick patient that is subject to
get infections or something that goes around that knocks you back in the
hospital again," said Syracuse University's Dutkowsky. "This is what
we hope won't happen." Yet the economy is still far from robust and fully
functioning, and not yet strong enough to "ward off any headwinds that
come about."

Published: February 28, 2013

Join the discussion

We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.

Three most recent Legal, regulatory, privacy issues stories:

1099-C frequently asked questions – Wonder why you received a 1099-C in the mail? Most taxpayers don't realize forgiven debt is considered income, and questions abound ...

Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!